How GST complicates the employee-employer relationship

How would you treat a car given to employees for their use under GST (goods and services tax)?" a tax head of a car company asked me.

'Why should it be such a big problem?' I wondered. Until I realised the nuances of such a transaction.

Is the car capitalised in the books of the company? Is it registered in the company's or employee's name?

As per the company's HR policy, is the employee allowed personal use of the car? If yes, is there any way to identify that personal use? Are there different entitlements, different models or variants of cars specified for each level in the organisational hierarchy? And many more queries.

Very often, we believe the employer-employee relationship to be beyond the purview of indirect tax. The company, we figure, is only a juridical person and operates through the acts of its employees.

So, the employee and the company should not be treated as different persons to charge tax on every transaction between them. But some of the entries in the GST law tend to defy this logic.

Schedule 3 of the Central GST (CGST) Act 2017 deals with activities or transactions that shall not be treated as supply. One entry specifies "services provided by an employee to the employer in the course of or in relation to his employment".

So, the consideration paid by an employer to the employee — i.e., salary paid for rendering services in the course of employment — would not be taxable under GST.

But what all can be treated as services in the context of employment? Will components covered in the cost-to-company (CTC) of an employee — house rent allowance, dearness allowance, etc — not attract GST, since this would be pure consideration to an employee for his employment? Also, what would be the treatment of, say, club fees reimbursed over and above the CTC?

If an employee of an IT company acts as a DJ at an office party and gets paid for the service, would it not be services rendered in the course of his employment? Would the same be treated as a service liable to GST?

The GST law complicates the employer-employee relationship further by way of Entry 2 in Schedule 1 of the CGST Act, "Supply of goods/services made without a consideration between related persons, when made in the course or furtherance of business, would be taxable."

Further, the law deems the employer and employee to be related persons. So, even if there is no consideration for the goods/services provided to an employee, the supply could still attract tax. Would this mean that laptops provided to employees would get covered, as these are provided in the furtherance of business? Well, they shouldn't. Why? Because there must exist an element of 'supply' in the transaction.

Supply mostly occurs when someone loses possession or ownership or both. Barring exceptions, typically this test holds good. When a laptop is given to an employee, he gets its possession, which he retains till he is in employment. But would that qualify as a supply? If it does, then even the workstation allotted to the employee must qualify as one.

This makes the scenario absurd. However, all things are not as black and white. If we take the example of free coffee from a vending machine provided to an employee, the answer may not be so simple.

Another twist in the tale is that the proviso to Entry 2 in Schedule 2 excludes from the definition of 'supply' gifts up to Rs 50,000 provided to an employee in a financial year. Hence, gifts above Rs 50,000 would be liable to GST and a company would be required to keep a record of gifts provided to each employee.

But would showing appreciation in the form of cash rewards or vouchers — as opposed to a gold coin, for instance — be considered as a gift? Or would it be considered for services of employment provided by the employee?

The employee and employer relationship revolves around many such examples. It is the play of words like 'in furtherance of', 'in relation to' and 'in the course of ' that makes the difference. So, it is necessary to understand each transaction and view it under the lens of the GST law.

Sometimes it may be prudent to tweak the HR policies and CTC structures, so as to make the compliance under GST simpler. Who said tax managers and tax consultants would lose relevance under GST?

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